As with most innovative new technologies, there are many misconceptions and flat out inaccuracies surrounding the digital cryptocurrency bitcoin. Many don’t really know what it is, let alone how it works or if it’s legal. Information about bitcoin is all over the internet and news media, but much of it is opinion or is just factually wrong.
So, first, what is bitcoin?
Bitcoin Magazine has a great, succinct explanation:
“Bitcoin means different things to different people. For some, it is a future of freely moving currency untied to any central bank. To others, it is a purely digital entity of questionable value and dubious origin. But what is Bitcoin, in the most basic sense?
In most casual conversations, you can get away with knowing that bitcoin is, basically, a digital currency. But of course, it’s much more complicated than that. In fact, it is two much more complicated things.
Bitcoin has been with us since 2009, when a person (or group) under the pseudonym Satoshi Nakamoto introduced a platform (Bitcoin, uppercase) that hosts a digital currency (bitcoin, lowercase).
Bitcoin the platform is built on the concept of “proof of work” data that is expensive and time-intensive to produce but can be easily verified. In Bitcoin’s case, proof of work is created through the process of “mining.” To mine a bitcoin, a computer must complete a complicated algorithm, essentially going through the work of an extensive calculation in exchange for some newly minted currency. That piece of digital currency is worth whatever the market decides through supply and demand.
Transactions are connected to a user’s Bitcoin address, which is stored on its general ledger, called the blockchain. If that address is linked to a real identity, transactions can be traced back to the user; if it isn’t, they can’t. This relative anonymity makes the platform appealing for things like incognito purchases over the internet.
A key component of Bitcoin’s blockchain is the fact that it is an open, distributed ledger. Through the distributed nature of this ledger, the transactions on the blockchain are verified by the consensus of every member, offering security and trust without a third-party overseer.
One of the most important things to keep in mind when thinking about what Bitcoin (or bitcoin) is: there is no single answer. Bitcoin is a platform that hosts a digital ledger on which people can mine, store and trade bitcoins, a digital form of currency earned through a computer algorithm and tied to no central authority.”
For those interested in a sound bite definition, here’s the TL;DR definition from Wikipedia:
“Bitcoin is a cryptocurrency, a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user-to-user on the peer-to-peer bitcoin network without the need for intermediaries.”
So Is Bitcoin Legal?
Bitcoin is legal to buy, sell, mine, and use in financial transactions in most countries all around the world. There are currently 10 countries that have made bitcoin illegal. And while they may have restrictions in place, the nature of bitcoin and its decentralized protocol make it impossible to completely prevent the use of it.
Is Bitcoin Money?
The term “legal tender” refers to methods of payment recognized by the jurisdiction or government where monetary transactions are taking place, and generally applies to coins and paper currency. As of now, bitcoin is not recognized by any government as legal tender, and therefore can only be used as a method of payment when both parties agree. Interestingly, the state of Ohio has begun accepting bitcoin as payment for state taxes, and this may pave the way for other governmental bodies to make the same move.
So What is the Legal Classification of Bitcoin?
In the United States, the Treasury classifies bitcoin as a virtual currency. The Commodity Futures Trading Commission (CFTC) classifies bitcoin as a commodity, and the Internal Revenue Service classifies bitcoin as property. Currently, regulatory bodies around the world also can’t quite agree on what they think bitcoin is or how it should be classified. What they can all agree on is that the interest in and demand for bitcoin and other cryptocurrencies is constantly growing.